Traditionally, finance teaches that managers should act according to the interest of the firm’s owners or its stockholders. There are different viewpoints in this case. Some agree with pure profit maximization and some not. I personally think here the goal is the main keyword .I mean what you want determines what you have to do.
What should you as a financial manager try to maximize?
Some people believe that the manager’s main goal always should be to try tomaximize profits. To do it, they should take only those actions that expected to increase revenues more than costs. It means maximizing in EPS (Earning Per Share). It seems a reasonable objective but as a goal suffers from several flows:
- First of all, figures for EPS are always historical so reflect past performance rather than what is happening now or what will happen in the future. If you as a manager seek only to maximize profits in a limited period, you may ignore the timing of those profits. Large profits that pay off many years in the future may be less valuable than smaller profits received next year.
- Second, Different accounting principles result differences in profit computing. It means when firms compute profits, they follow certain accounting principles which focus on accrued revenues and costs. A firm that is profitable according to accounting principles may spend more cash that it receives and an unprofitable firm may have larger cash inflows than outflows. There is a famous expression in finance saying:” you cannot pay your bills with earning, only with cash!!” In finance, we place more emphasis on cash than on profit or earning.
- Finally, as a manager you have to include variability or risk. Focusing only on earning may ignore them. When comparing two investment opportunities, we must consider both the risk and the expected return of the investment and we face a trade-off between risk and expected return.
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